Factoring ESG issues

Respondents to this month’s Off The Record survey highlighted various issues they felt to be their main responsibility as a fiduciary. A UK fund stated: “The fiduciary duty of a pension fund is to pay the pension promise to its members. Where ESG issues have the potential to impact the ability to meet that promise, it is the responsibility of the trustee to act to reduce this risk.”

A Swiss fund said: “Our responsibility is to achieve returns through a sensible and sustainable investment policy, avoiding assets which can lead to permanent losses of capital.” Over two-thirds of respondents said their pension fund board spent under 10% of its time per meeting on ESG related issues, while all respondents spent less than 30% of each meeting on it.

Twenty-four respondents believed governance factors were very important in meeting responsibilities. Just over half of respondents considered social factors to be important, a quarter thought them unimportant, with the rest neutral. A third thought environmental factors were unimportant, almost half said they were important, and the rest were neutral.

Respondents considered resource efficiency and readiness for climate change the most important risk factor, followed, in order of importance, by safety and pollution, executive remuneration, boardroom diversity, employee welfare, adherence to corporate governance norms and codes, and responsibility to customers and the broader community.

Other issues were identified. A Dutch fund highlighted “keeping an eye on the future, both return prospects and (potential) liabilities issues, and investing in the strength of your own organisation.” A Latvian fund specified “the level of competition, business cycle, and industry nature”.

Respondents were split as to whether it is possible as a fiduciary to reflect the broad interests of all members in a single ESG policy. A Danish fund felt that it was: “We have adopted the UN Global Compact as our basis for evaluating investee companies’ ESG performance and readiness, since it offers us an internationally and universally accepted framework that covers the most important ESG factors.”

A German fund added: “A responsible investment policy is important as a sign to the beneficial owners. Responsibility and sustainability is simply a prudent aspect of investing.” However, a UK fund said: “It is not possible, and a fund shouldn’t even try.”

In total, 41% of respondents thought the pressure of governments wanting pension funds to invest for the “common good” conflicted with their responsibilities as a fiduciary. A Portuguese fund said: “The big issue for pension funds in developed economies is welfare state sustainability due to the overall pressure of broad public debt (including social security obligations). Our task as pension fund managers is to maximise DC schemes and minimise the risk of failure in DB schemes. ‘Common good’ themes should be included in ‘global legislation and regulation’, not in specific regulation for funds.”

However, 60% of respondents disagreed. “The pressure is not significant. If the ‘pressure’ opens up new asset classes for investments then this is helpful. The decision to invest will use the normal risk/return criteria,” stated a UK fund.

Two-thirds of respondents said they pursued an ESG policy because it is an important aspect of managing long-term investment risk. Some 35% did so as it fits with the core mission of their organisation, but just 4% did so believing it to be the morally right thing to do.